Macro Digest: Deficits matter... again

Steen Jakobsen

Chief Economist & CIO
Steen Jakobsen first joined Saxo in 2000 and has served as both Chief Economist and Chief Investment Officer since 2009. He focuses on delivering asset allocation strategies and analysis of the overall macroeconomic and political landscape as defined by fundamentals, market sentiment and technical developments in the charts.

The current macro landscape sees China and its currency taking centre stage while developments in Japan and the JPY are also at an important juncture. We look for a lower CNY and a higher JPY.

The yuan, the yen, and the yardstick

CNY: Part of the current 'Chinese panic' has to do with the country's rising current account deficit. The key conclusion here? China needs a weaker yuan.

We see a test and a potential break of 7.0000 (USDCNY) inside the next year.

JPY: Across the East China Sea, Japan's currency also stands at a crucial turning point: USDJPY, in fact is close to being our highest-conviction trade; we remain short from the 112.10 level reached on August 1 with our stop-loss set at a daily close around 112.70.

A return to the '80s?

Macro-wise, the world is reverting to a theme not seen since the 1980s and '90s: debt and deficits matter. Rises in both the absolute and the marginal costs of money are shifting the global flow towards a home bias.

In the '80s and '90s, we sold deficit currencies and bought surplus FX. This game could be on its way back.

Chinese current account and Q4 SMA trend

Source: Bloomberg

Observe how when China “needed” fiscal and monetary stimulus in 2008/09, it had plenty of room; now the opposite is true. One clear sidebar to the current Sino-US trade war is the countries' under-acknowledged co-dependence. Both the US and China how run deficits, meaning that the need for foreign direct investment as a funding tool for said deficits is growing. China has grown up, but now needs more interaction and opening up of capital accounts to share the burden of refinancing and rolling over its debt.

This in turn means that Europe and – more importantly – Japan need to fund this gap. Japan’s $2.4 trillion in overseas investments,  however, is now under some pressure to move home, but Japanese investors are now getting a better deal staying home as FX hedging costs eat the of excess yield.


Only Italy with its big tail-risk can compete in the five-year maturity while in the 10-year, France + Belgium + Spain and Italy are similar but not in excess on domestic return...

Source: Bloomberg

The big capital flows are starting to reverse and with US growth most likely having peaked and China restarting its growth engine, the rest of the world – including emerging markets and commodities – should receive some support.

For now, however, the focus is squarely on JPY and CNY (plus the ever-weaker TRY).

FX will lead and a signal could be forthcoming very soon.

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